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Fed Chair Powell notes ‘highly uncertain’ Ukraine impact, but says rate hikes
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Federal Reserve


FED CHAIR POWELL NOTES ‘HIGHLY UNCERTAIN’ UKRAINE IMPACT, BUT SAYS RATE HIKES
ARE STILL COMING

Published Wed, Mar 2 20228:30 AM ESTUpdated Wed, Mar 2 20221:05 PM EST
Jeff Cox@jeff.cox.7528@JeffCoxCNBCcom
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Key Points
 * Fed Chairman Jerome Powell said Wednesday he still sees interest rate hikes
   ahead though he noted the “implications for the U.S. economy are highly
   uncertain” from the Ukraine war.
 * Powell called the labor market “extremely tight” and said inflation has risen
   well above the Fed’s 2% target.
 * His remarks are part of mandatory appearances this week before House and
   Senate committees in Congress.

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VIDEO3:3003:30
Here’s how Fed Chair Powell sees the March Fed meeting
Squawk on the Street


Federal Reserve Chairman Jerome Powell still sees interest rate hikes coming,
but noted Wednesday that the Russia-Ukraine war has injected uncertainty into
the outlook.

Powell said he sees a series of quarter-percentage-point increases coming,
though he left open the possibility of moving more aggressively should inflation
persist.



In remarks prepared for dual appearances this week before House and Senate
committees in Congress, the central bank chief acknowledged the “tremendous
hardship” the Russian invasion of Ukraine is causing.



“The implications for the U.S. economy are highly uncertain, and we will be
monitoring the situation closely,” Powell said.

“The near-term effects on the U.S. economy of the invasion of Ukraine, the
ongoing war, the sanctions, and of events to come, remain highly uncertain,” he
added. “Making appropriate monetary policy in this environment requires a
recognition that the economy evolves in unexpected ways. We will need to be
nimble in responding to incoming data and the evolving outlook.”

Later, he said the Fed wants to get inflation under control, but “the bottom
line is that we will proceed but we will proceed carefully as we learn more
about the implications of the Ukraine war on the economy.”

The observations come amid 40-year highs for inflation in the U.S., complicated
by a Ukraine war that has driven oil prices to around their highest levels in a
decade. Consumer prices increased 7.5% from a year ago in January, and the Fed’s
preferred inflation gauge showed its strongest 12-month gain since 1983.



Powell and his fellow policymakers have been indicating for weeks that they plan
to start raising benchmark interest rates to tackle inflation. He reiterated the
stance Wednesday that the process will involve “interest rate increases,” along
with indications that the Fed eventually will start reducing its bond holdings.

“We will use our policy tools as appropriate to prevent higher inflation from
becoming entrenched while promoting a sustainable expansion and a strong labor
market,” he said. “We have phased out our net asset purchases. With inflation
well above 2 percent and a strong labor market, we expect it will be appropriate
to raise the target range for the federal funds rate at our meeting later this
month.”

Powell said the likely path for rate hikes will be increments of a quarter
percentage point, though he said he would be open to more aggressive moves if
inflation gets worse.

“We’re going to avoid adding uncertainty to what is already an extraordinarily
challenging and uncertain moment,” he said under questioning from House
Financial Services Committee members. “To the extent that inflation comes in
higher or is more persistently high than that, we would be prepared to move more
aggressively by raising the federal funds rate by more than 25 basis points at a
meeting or meetings.”


INFLATION STILL EXPECTED TO FALL

The Fed will start cutting the size of its asset holdings after rate hikes have
begun, he added.

Since the beginning of the Covid pandemic, the Fed has been buying Treasurys and
mortgage-backed securities at the fastest pace ever, driving the total holdings
on the central bank balance sheet to nearly $9 trillion.

Powell said the reduction will be conducted “in a predictable manner,” largely
through allowing some proceeds from the bonds to roll off each month rather than
reinvesting them.

On the economy, the chairman said he still expects inflation to decelerate
through the year as supply chain issues are resolved. He called the labor market
“extremely tight” and noted strong wage gains, particularly for lower earners
and minorities.

“We understand that high inflation imposes significant hardship, especially on
those least able to meet the higher costs of essentials like food, housing, and
transportation,” he said. “We know that the best thing we can do to support a
strong labor market is to promote a long expansion, and that is only possible in
an environment of price stability.”

Markets have fully priced in a rate increase at the March 15-16 meeting but have
decreased expectations for the rest of the year since the Ukraine war began,
according to CME group data. Traders are now pricing in five
quarter-percentage-point increases that would take the benchmark federal funds
rate from its current range of 0%-0.25% to 1.25%-1.5%.


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